Over the past two decades, private credit has evolved from a niche segment into a prominent force in the private capital landscape. Assets under management surged from $300 billion in 2010 to roughly $1.6 trillion by 2023, with forecasts suggesting the asset class could control roughly $3 trillion in capital by 2028. Bank retrenchment has been a principal driver, creating a financing void that private credit providers have stepped in to fill. In turn, the wider availability of private credit and its distinct advantages has drawn in both borrowers seeking flexible financing and institutional investors eager to scale up allocations. Collectively, these dynamics will sustain the asset class’s rapid growth.
Before the Global Financial Crisis’ (GFC) seismic impact across the financial sector, banks were the primary lenders to corporate borrowers. To incentivize banks to hold safer assets and diffuse credit risk from taxpayers, post-crisis regulations, including Dodd-Frank and Basel III, raised capital thresholds, tightened underwriting requirements, and deepened reporting standards. Banks became more conservative and focused on larger, more stable companies with better credit profiles, using an ‘underwrite and distribute model’ to offload credit risk from their balance sheets while earning fee revenue.
As a result, mid-sized companies, which often lack credit histories and pursue smaller loans, struggled to secure financing in the broadly syndicated loan market, creating a lending gap that private credit stepped in to fill. Non-bank lenders, less constrained by these post-GFC regulations, offered more flexible and tailored financing solutions to mid-sized companies. This shift is reflected in the sharp decline in syndicated loan issuance to middle-market borrowers compared with pre-GFC levels.
When Silicon Valley Bank (SVB) collapsed and triggered the regional banking crisis in 2023, it similarly served as another watershed moment for private credit. Banks once again pulled back, positioning the asset class to capture market share amid another significant liquidity crunch. A similar stark retreat occurred during April 2025’s tariff-induced uncertainty, which sent the broadly syndicated loan market to a complete halt in issuance for 14 consecutive days — the longest freeze since the Covid-19 pandemic.
These episodes acutely highlight several advantages of the private credit lending model over traditional bank financing. Namely, banks operate with an inherent “maturity mismatch” in their lending structure, funding long-term loans through short-term deposits. This fundamental misalignment between loan duration and deposit tenor became the Achilles heel that exacerbated banks’ liquidity challenges during both the GFC and the recent regional banking crisis.
During the frothy economic conditions of 2021, for example, SVB accumulated substantial deposits from its venture-backed clientele, channeling these funds into government treasury bonds yielding historically low interest rates. In 2023 when the fundraising environment for startups dried up, many SVB clients withdrew large deposits to meet their operational cash needs. Simultaneously, the Federal Reserve’s aggressive interest rate hiking cycle ignited a sharp devaluation in SVB’s long-dated bond holdings. Faced with mounting withdrawal demands, the bank was forced to sell these depreciated bonds at significant losses, leading to its ultimate demise.
In contrast, private credit circumvents this vulnerability, as loans are funded with committed capital from institutions whose long-term investment horizons align with the loan holding period. Additionally, private credit loans are less sensitive to rising interest rates, and lenders benefit from capital reserves that help maintain stability during economic downturns.
As John Gray, the President and Chief Operating Officer of Blackstone says, private credit offers the ability to provide borrowers with “farm-to-table” customization for sourcing credit. Sponsors have developed a growing preference for the unique advantages private credit solutions provide across structuring, lender relationships, and deal timelines.
While private credit lenders conduct extensive due diligence on underlying companies, their fund structures often allow clients to bypass the time and cost of obtaining debt ratings. This provides greater ease for digesting complex transactions than syndicated loans, which prove highly sensitive to credit ratings and can face significant refinancing difficulties following a ratings downgrade.
Additionally, syndicated deals typically involve 30 to 100 lenders and require roadshows that can keep transactions in the market for up to a month. This extended timeline creates substantial market and execution risk, as pricing frequently adjusts wider or tighter depending on prevailing market conditions. Conversely, private credit transactions rely on a much smaller group of lenders and offer fixed pricing from the outset, providing sponsors with greater certainty regarding deal terms and execution.
With fewer financing parties, lenders can build closer borrower relationships, gaining deeper insights into underlying business conditions. This relationship-driven approach supports more tailored structures, including flexible repayment terms, covenants, and pricing. During drawdowns, these close borrower ties have bolstered the asset class’s resilience, enabling lenders to work hand-in-hand with sponsors and management to navigate economic headwinds.
Private credit also provides deal structures and financing terms typically unavailable in public markets, with borrowers willing to accept wider spreads in exchange for this flexibility. For example, obtaining a first and second lien credit agreement in the syndicated market requires negotiating two different agreements. As a result, syndicated loan deals can entail complex capital structures, with multiple debt tranches that lead to competing interests in workouts and restructurings. Here, private credit’s namesake unitranche structure, which combines senior and junior debt into a single loan, has become a borrower favorite, simplifying lender management and reducing cross-default risk.
Delayed-draw term loans (DDTL) are another powerful tool of the asset class, offering buy-and-build platforms the flexibility to fund add-on acquisitions under the original loan terms. While the broadly syndicated market has experimented with similar structures, DDTLs are more naturally suited to private credit, where the smaller lender base simplifies execution.
Ultimately, as borrowers flock to private credit, the asset class is claiming a larger slice of the leveraged buyout market, and its expanding influence has become particularly noticeable in larger transactions. Before the Federal Reserve began tightening rates in 2022, around 80% of buyouts valued at $1 billion or more relied on syndicated loans. By 2023, private credit had taken a record 54% of that segment. Even as the syndicated loan market regains momentum and offers a cheaper cost of capital, direct lenders have maintained a strong presence, underwriting nearly half of these large LBOs in 2025.
The boom in private debt has equally been fueled by institutional investors eager to diversify their fixed income portfolios. According to Coller Capital’s 2025 Global Private Capital Barometer, 45% of LPs expect to lift their targets for private credit over the next year — a notable increase from 37% in 2024. Insurers and pensions have been especially active in upping their allocations to private credit, as the asset class provides predictable long-dated cash flow streams that they can tailor to their liability-driven needs.
For example, US pension allocations to private debt expanded at a 20% annual growth rate over the past decade, nearly double the 11% growth rate recorded for private equity over the same period. More broadly, private credit’s mix of yield, diversification, and downside protection is drawing interest well beyond pensions and insurers. For example, while fundraising across private markets slowed in recent years, private credit’s relative share of total private capital raised increased year- over-year between 2023 and 2024.
This enhanced appetite for the asset class has largely been driven by the higher interest rate environment and wider spreads that emerged after 2022, pulling yield-seeking investors into the asset class. Although spreads have since narrowed and the path of rates remains uncertain amid shifting inflation, growth, and trade policies, forward-looking SOFR curves suggest borrowing costs will stay high relative to historical trends. This “higher for longer” backdrop will likely enable direct lenders to capture 200 to 300 basis points more in floating-rate yield than during the era of near-zero rates, contributing to attractive absolute returns.
Notably, private credit can offer these robust yields alongside downside protection. The asset class has historically exhibited lower volatility and default rates compared to public high-yield markets, driven by several structural benefits. For one, private credit deals are often “covenant-heavy,” insulating lenders by setting clear liquidity and leverage thresholds for companies. These terms contrast sharply with the “covenant-lite” structures that dominate syndicated lending. That said, increased competition in direct lending is beginning to pressure the historically strong covenants private credit has traditionally maintained.
Several other features contribute to private credit’s attractive return profile. In senior direct lending, hefty equity cushions beneath the debt give lenders protection rarely seen in public credit. The typically floating-rate structure of these loans shields investors from the interest rate swings that rattle high-yield bonds. Additionally, private credit funds often use leverage to boost returns, a tool largely unavailable in public markets.
Together, these characteristics have driven the asset class to deliver strong risk-adjusted returns over the past decade. From 2005-2025, direct lending posted lower credit losses than high-yield bonds and leveraged loans, while delivering about 90% of the returns of public equities with less than a quarter of the volatility. Notably, this period of outperformance is inclusive of a much lower rate environment, demonstrating that even as base rates and spreads fluctuate, private credit continues to produce compelling absolute returns.
Further, while senior direct lending has long dominated private credit, the asset class now spans a broader opportunity set, including asset-backed finance and infrastructure debt to project and fund finance. Allocating across these segments allows LPs to diversify their exposure, benefit from better correlation dynamics, and tap structural tailwinds beyond corporate fundamentals.
Private credit, for instance, will play a central role in financing the energy transition, offering income linked to one of today’s most transformative capital formation themes. Looking ahead, gaining access to this level of diversification will be increasingly valuable as direct lending faces rising competition and market saturation. Importantly, while private credit can offer LPs attractive returns, it also brings a range of considerations that must be carefully weighed when expanding allocations.
For one, as the asset class gains prominence, managers have moved swiftly to satisfy investor demand. This has driven the accumulation of significant dry powder reserves over a short period of time. With capital piling up — particularly amid a subdued private equity dealmaking environment — concerns linger over whether deployment pressures could lead lenders to compromise on borrower quality.
Additionally, while high interest rates can boost yields, they can equally strain borrowers’ cash flows, surfacing default risks. Further, differences in credit quality across regions, sectors, and issuers surface other important factors. These dynamics, however, only underscore what is a fundamental characteristic of private market asset allocation — performance dispersion is considerable. To generate strong returns, LPs must master manager selection and diligence, evaluating lenders’ underwriting frameworks, leverage use, and relationship networks to succeed in the asset class.
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